FXstreet.com Live Sessions Archives: Trading Candlestick Patterns

Expert: Ron William, FX Strategist at Investors Intelligence

Topics to be covered during the session:

- Basic introduction to candlesticks and history
- System for success
- Applying this unique art in analysis and trading
- Powerful candlestick signals
- Using indicators to confirm candle
- Improving risk and reward opportunities
- Market examples across a variety of asset classes
- Golden trading principles

Who is Ron William?

Ron William has recently joined Investors Intelligence, a leading provider of research and technical analysis, after five years working as a techical analyst for IDEAglobal, where he developed trading strategies and research for senior professionals in the financial industries. Ron primarily contributes to the macro hotline service and is a presenter for the ‘Introduction to Technical Analysis’ training course. He also writes for mainstream investment publications/websites and appears periodically on financial media programs.

Session Material:

PowerPoint Presentation - Download trading_candlestick_patterns.pps

Session Transcript

FXstreet Moderator (Aug 22, 2006 9:13:20 AM)
Good morning, good afternoon, and good evening to all of you joining us today from different parts of the world. This is Mercè Francisco, Live Session Moderator, and I want to welcome all of you to today's Live Forex Expert Question and Answers session.

FXstreet Moderator (Aug 22, 2006 9:44:40 AM)
Welcome to FXstreet.com Q&A Forex Session. Today’s session will start in 5 minutes.

FXstreet Moderator (Aug 22, 2006 9:44:54 AM)
Meanwhile we recommend you to read the speech material that you can find on your left window.

FXstreet Moderator (Aug 22, 2006 9:45:18 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderator (Aug 22, 2006 9:45:31 AM)
Please prepare any questions you may have for the expert. Thank you for joining today’s Q&A Session.

FXstreet Moderator (Aug 22, 2006 9:49:30 AM)
Welcome to the Session.

FXstreet Moderator (Aug 22, 2006 9:49:45 AM)
Today I am delighted to welcome our guest speaker Ron William, FX Strategist at Investors Intelligence. (http://www.investorsintelligence.com)

FXstreet Moderator (Aug 22, 2006 9:49:55 AM)
Welcome Ron!

Ron William (Aug 22, 2006 9:50:09 AM)
Thank you very much!

Ron William (Aug 22, 2006 9:50:51 AM)
More importantly, many thanks to everyone that has joined us in this exciting forum on Japanese candlesticks

Ron William (Aug 22, 2006 9:52:21 AM)
Its probably best that we begin by covering some of the basics, so to bring everyone up to a level playing field

Ron William (Aug 22, 2006 9:52:54 AM)
"A clever hawk hides its claws" Japanese proverb

Ron William (Aug 22, 2006 9:53:36 AM)
For centuries Japanese candlesticks have revolutionised the way people analyse the markets

Ron William (Aug 22, 2006 9:54:52 AM)
The methodology dates back to the 1600s and was originally used by Japanese rice farmers to monitor and forecast crop pices.

Ron William (Aug 22, 2006 9:55:06 AM)
*prices

Ron William (Aug 22, 2006 9:56:14 AM)
A famous trader named Homma (who was aware of the supply/demand links), realised thr markets were strongly influenced by EMOTIONS

Ron William (Aug 22, 2006 9:56:51 AM)
EMOTIONS will be a central theme throughout this session

Ron William (Aug 22, 2006 9:57:27 AM)
CANDLE basics

Ron William (Aug 22, 2006 9:58:54 AM)
Candlestick construction is almost identical to the traditional bar chart, which have been used in the west since the 1900s

Ron William (Aug 22, 2006 9:59:38 AM)
All you need is 4 data points, an open, high, low and close.

Ron William (Aug 22, 2006 10:01:43 AM)
The second principle to keep in mind is that there are two segements that make up a candlestick - Rectangular section, which Japanese chartists call 'the real body', this is the relationship bewteen the openand the close

Ron William (Aug 22, 2006 10:03:07 AM)
Shadows are the second part of the candlestick contruction, which basically look like the wick on a candle, hence the name 'candlestick'.

FXstreet Moderator (Aug 22, 2006 10:04:40 AM)
Please send your questions.

Rochi (Aug 22, 2006 10:04:58 AM)
the real body is the escence of market psychology... and what importance do shadows have?

Ron William (Aug 22, 2006 10:05:32 AM)
Good question! As you quite rightly pointed out, Japanese chartists believe that the ‘real body’ is the essence of market psychology.

Ron William (Aug 22, 2006 10:06:17 AM)
However, shadows also share an important role. They indicate that momentum has been offset, i.e. bull/bear power has weakened. I like to think of it as a ying-yang relationship between the candle’s ‘real body’ and its shadow (wick).

Guest_zenfan (Aug 22, 2006 10:07:40 AM)
Which indicator would you use to comfirm candles?

Ron William (Aug 22, 2006 10:09:08 AM)
Usually, I would keep this question for further on in the session, however, I would like to field as many questions as possible.

Ron William (Aug 22, 2006 10:11:16 AM)
To answer your question, a preferred choice of momentum indicator is good for confirming a candlestick signal - somethiung that measures overbought/oversold conditions

Ron William (Aug 22, 2006 10:12:31 AM)
remember, the majority of candlestick signals are 'reversal' oriented, so you are essentially looking to watching for trend reversal points.

Ron William (Aug 22, 2006 10:13:35 AM)
Momentum indicators which are traditionally used for measuring overbought/oversold conditions include, RSI, Stockchastics and so on

Ron William (Aug 22, 2006 10:15:33 AM)
In final note, keep in mind that price is ultimately the king indicator - it leads and does not lag. Also, follow the three C's whenever analysing candstick patterns - confluence, continmuationa nd confirmation.

Ron William (Aug 22, 2006 10:16:40 AM)
2nd c - *continuation

Guest_astuk (Aug 22, 2006 10:17:52 AM)
Thanks Ron, when we look on shadows and its size, how to interpret guyers/sellers behaviour on different candles and when it's important to look after it , in what market condition ?

Ron William (Aug 22, 2006 10:18:38 AM)
CONTEXT, CONTEXT, CONTEXT.

Ron William (Aug 22, 2006 10:19:30 AM)
That was the short answer, but to answer in more detail there are a few guidines that I always try to keep in mind...

Ron William (Aug 22, 2006 10:20:16 AM)
Always ask yourself, what do candlesticks measure?

Ron William (Aug 22, 2006 10:21:28 AM)
Answer: Candlesticks gauge the emotional health of the market, as you quite right noted, the interpretation of buyers and sellers.

Ron William (Aug 22, 2006 10:23:50 AM)
the key point to keep in mind is TREND, idetify the direction of the trend and its consistent/inconsistent characteristics.

Guest_Pls (Aug 22, 2006 10:25:19 AM)
What is the main principles in trading with candlesticks?

Ron William (Aug 22, 2006 10:25:49 AM)
A great question!

Ron William (Aug 22, 2006 10:27:39 AM)
There are two parts to this, following the three C's to trading candlesticks i.e. Confluence, Continuation and Confirmation and the second part is RISK/REWARD.

Ron William (Aug 22, 2006 10:28:34 AM)
This last part is crucial! It is literally the difference between winning anbd losing.

Ron William (Aug 22, 2006 10:29:56 AM)
There are many candlestick patterns and in all practical terms, just spotting one of over 50 candlestick signals will not improve your chances in making profit.

Ron William (Aug 22, 2006 10:32:32 AM)
The main principle is to consider your risk/reward ratio, before trading a candlestick signal (morning star, hammer, bullish engulfing etc). Money management is like water, it either sinks a ship or keeps it afloat!

Guest_adriann (Aug 22, 2006 10:35:18 AM)
i saw candlestic colored to the red/green or blue but i saw also filled/not filled which part of bull/bear is filled/not filled real body?

Ron William (Aug 22, 2006 10:36:12 AM)
Important question, especially for bring us all onto a level playing field.

Ron William (Aug 22, 2006 10:37:17 AM)
My best advice would be to not think about the colour coding of a candlestick and instead review its construction logic.

Ron William (Aug 22, 2006 10:39:42 AM)
Therefore, a bullish (positive) session is where the market closes higher than its open and rises - the opposite is true for a bearish (negative) session, where the market closes below its opening price.

LelioBR (Aug 22, 2006 10:41:13 AM)
Althought there are many candles that suggest reversions, in your experience what is (or what are) the most common candle(s) that reinforces support (or resistances) and then mark reversal on daily charts ? Thank you.

Ron William (Aug 22, 2006 10:41:52 AM)
Quite pleasing to see a great mix of questions.

Ron William (Aug 22, 2006 10:46:29 AM)
In answer, the most powerful candlestick patterns in my experience would be the doji, hammer, key day reversal (including early candle signal derivatives of 'dark cloud cover' and 'piercing line') and finally the window (otherwise known as the gap). Although note, this last signal is used differently by Japanese chartists.

Ron William (Aug 22, 2006 10:48:13 AM)
Of course, this does not mean that other candlestick patterns dont work as well, its just that some are either rare to find, therefore offering less trading opportunities or even that they more often than not offer poor risk/reward trades.

Ron William (Aug 22, 2006 10:49:39 AM)
The only other powerful, but somewhat rare signal to find and trade, are part of the three session reversal candlestick patterns, i.e. morning/evening star, three black crows etc...

Karl (Aug 22, 2006 10:50:43 AM)
which takes precedence candlestick patterns or chart patterns?

Ron William (Aug 22, 2006 10:51:33 AM)
Interesting question, I would say that they both complement each other.

Ron William (Aug 22, 2006 10:52:38 AM)
However, if you were faced with the question of chosing to observe/trade a candlestick pattern or a chart pattern, I would choose the candlestick pattern.

Ron William (Aug 22, 2006 10:54:41 AM)
Remember that candlesticks measure the market psychology session by session and should therefore enlighten you as to the personality of that particular financial market, giving you EARLY signals.

Ron William (Aug 22, 2006 10:55:07 AM)
In comparison, chart patterns can lag.

Ron William (Aug 22, 2006 10:56:50 AM)
Above all though its important to keep in mind the CONTEXT of the market move. So if we were sitting at trading computer screen right here, righ now, I would say "show me the chart".

FXstreet Moderator (Aug 22, 2006 10:58:19 AM)
You can explain more about the confirmations? When I can say: Is a real confirmation, etc. Adem

Ron William (Aug 22, 2006 10:59:02 AM)
Hello Adem and many thanks for your partcipation today...

Ron William (Aug 22, 2006 11:00:00 AM)
A real confirmation is usally (as with most forms of analysis) subject to your interpretation.

Ron William (Aug 22, 2006 11:01:55 AM)
I have covered the 'what is a real confirmation' ground extensively with computer programmers, attempting to automate a few signals and ultimately improve trading probabilities...

Ron William (Aug 22, 2006 11:03:40 AM)
Again, I would first reiterate the three C's approach to trading candlestick patterns (Confluence, Continuation and Confirmation)...

Ron William (Aug 22, 2006 11:06:39 AM)
What do these three principles mean? Well confluence suggests that you use a whole range of signals to provide the trading setup, EAST meets WEST - Japanese candlestick analysis complementing Western, e.g. basic concepts like Trend-lines, Support/Resist, Moving averages to Fibonacci and Elliott Wave etc...

Ron William (Aug 22, 2006 11:08:28 AM)
Continuation means actually waiting to the price to follow through. For those of you that have a good understandnding of candlestick patterns, think about the shooting star pattern for example...

Ron William (Aug 22, 2006 11:09:00 AM)
when is a shooting star, actually a shooting star reversal signal?

Ron William (Aug 22, 2006 11:10:01 AM)
of course the answer is, once the market reverses below the shooting star.

Ron William (Aug 22, 2006 11:12:06 AM)
There are ways to build a strategy around this, so that you could open a cautionary position and then perhaps increase the size on further follow-through - or to keep with the second C principal, continuation.

Ron William (Aug 22, 2006 11:12:59 AM)
The third C is an extension of the second, confirmation and merely ensures that you get more right trades than wrong!

Ron William (Aug 22, 2006 11:14:07 AM)
The bottom-line is to follow a system of guidelines that work for you and of course your money management.

Aliks (Aug 22, 2006 11:15:33 AM)
what percent of accuracy to you give to candlestick signals?

Ron William (Aug 22, 2006 11:17:54 AM)
Always a popular question, my answer would be EXTREMELY HIGH! I tend to steer clear of percentage statistics simply because I have yet seen a really good back-test analysis of candlestick patterns.

Ron William (Aug 22, 2006 11:18:27 AM)
*have NOT seen

LelioBR (Aug 22, 2006 11:20:15 AM)
How effective are candlesticks on intraday charts, say 4 Hours Chart ? Do they fine tune the entry/exit points ?

Ron William (Aug 22, 2006 11:21:07 AM)
The great thing about candlesticks is that they can be applied to pretty much all time frames.

Ron William (Aug 22, 2006 11:22:25 AM)
I'd say anything between 15min intraday charts to weekly data (not to keen on monthly charts).

Ron William (Aug 22, 2006 11:24:03 AM)
KEY: Mass psychology, a market that has high participation, volume, volatility work best when switching between time frames.

Ron William (Aug 22, 2006 11:25:38 AM)
Yes, to the second part of your question, intraday analysis should fine tune entry and exit points...

Ron William (Aug 22, 2006 11:25:53 AM)
within higher timeframes

Guest_Al (Aug 22, 2006 11:26:12 AM)
are there subtle differences of interpretations according to type of finacial instrument.. ie..fx vs equities

Ron William (Aug 22, 2006 11:27:21 AM)
Yes there are subtle differences on different financial instruments, esp. between fx and equities.

Ron William (Aug 22, 2006 11:28:00 AM)
First difference would be the open and close data points

Ron William (Aug 22, 2006 11:28:51 AM)
FX markets trade 24hours in three different time zones, whereas equities have opening and closing exchanges.

Ron William (Aug 22, 2006 11:31:18 AM)
On this note, I would recommed using London trading hours for the major currency rates. London trading accounts for 31% of total FX volume and 42% including Germany, France and Switzerland. Whereas , the US only accounts for 19%.

Ron William (Aug 22, 2006 11:33:14 AM)
The second point is that of volume, equity market have it, FX dont. The volume indicator is very important for confirming candlestick signals, telling you if there really is any power behind the move or not.

FXstreet Moderator (Aug 22, 2006 11:35:56 AM)
LAST QUESTION

Guest_zenfan (Aug 22, 2006 11:36:01 AM)
What is/are the golden trading principles?

Ron William (Aug 22, 2006 11:39:17 AM)
Golden trading principles: 1.) Wait for the session's close to confirm, 2.) Do NOT use candles in isolation, 3.) Always consider risk/Reward rations before placing a trade with a candle signal 4.) Candles do not offer price targets (use western tecniques for this) 5.) Remember the importance of stops "even monkey's fall out of trees" Japanese proverb.

FXstreet Moderator (Aug 22, 2006 11:40:32 AM)
That’s all we have time for Today.

FXstreet Moderator (Aug 22, 2006 11:41:03 AM)
Thank you very much for that Ron.

Ron William (Aug 22, 2006 11:42:26 AM)
Thank you very much for inviting me and moreso for everybodies participation!

Ron William (Aug 22, 2006 11:43:13 AM)
I'd like to leave you all with a final thought: Jesse Livermore, the famous trader from 1900s once said “Human nature never changes, Only people change, the pockets change, the technology changes. But the market never changes and people drive the market; NOT reason, NOT economics and certainly NOT Logic. It is the HUMAN EMOTION that drives the market.”

Ron William (Aug 22, 2006 11:44:28 AM)
Japanese candlesticks is unrivaled in gauging market psychology.

Ron William (Aug 22, 2006 11:44:37 AM)
Thankyou all...

FXstreet Moderator (Aug 22, 2006 11:45:29 AM)
Thank you all for your participation. See you soon!